Betting against beta betting against beta we thank cliff asness. Lieberman award, stanford university, 2000, awarded biennially to a business school student with a demonstrated potential for a leadership role in the academic community. Betting against beta and gamma using government bonds. Go long low beta stocks and use leverage to make the beta 1. The authors explain the phenomenon based on debt constraints. Secondly, i use an index of investor sentiment baker and wurgler, 2007 to answer the question does investor sentiment explain the betting against beta. First, to what extent are babgov profits an anomaly. We use the bab returns for us stocks obtained from aqrs data library s. Go short high beta stocks and reduce the net exposure to make the beta 1. This essentially leaves most small investors with an etfbased strategy. We present a model with leverage and margin constraints that vary across investors and time.
Betting against beta capm strategy betting against beta. The new york fed has been working with triparty repo market participants to make changes to improve the resiliency of the market to financial stress. The lowbeta anomaly can be exploited in a long only portfolio a longshort factor whether you trade long only or longshort, the factor is a useful tool for performance measurement betting against beta bab factor. Betting against beta or demand for lottery turan g. A basic premise of the capital asset pricing model capm is that all agents invest in the portfolio with the highest sharpe ratio, or expected excess return per unit of risk, and leverage or deleverage this portfolio to suit their risk preferences. Frazzini and pedersens 2014 betting against beta bab factor is based on the same basic idea as blacks 1972 betaarbitrage, but its astonishing. Frazzini, andrea and pedersen, lasse heje, betting against beta october 9, 2011. Both portfolios are rescaled to have a beta of one at portfolio formation. August 2014 abstract frazzini and pedersen 2014 document that a betting against beta strategy that takes long positions in low beta stocks and short positions in high beta stocks generates a large abnormal. Further evidence from china and the us xing hana,b, kai lic, youwei lid adepartment of accountancy and finance, university of otago, 60 clyde street, 9016 dunedin, nz bdepartment of financial economics, ghent university, sintpietersplein 5, 9000 ghent, belgium c university of technology sydney, business school, po box 123, broadway, nsw 2007, australia.
Betting against beta yale economic yale university. This thesis main idea is the explore betting against beta factor in belgium stock market. The betting against beta factor is a selffinancing portfolio that is long the low beta portfolio and short the highbeta portfolio. The zerobeta betting against beta bab factor is a selffinancing portfolio that is long the low. Benson durham federal reserve bank of new york staff reports, no. Further evidence from china and the us xing hana,b, kai lic, youwei lid adepartment of accountancy and finance, university of otago, 60 clyde street, 9016 dunedin, nz. We conclude that the betting against beta phenomenon is a. A bab factor is long a portfolio of lowbeta assets, leveraged to a beta of 1, and short a. Betting against beta and gamma using government bonds january 2015 number 708. Previous studies do not address routine valuation frameworks, such as termstructure models or principal components analysis. Pedersen new york university, copenhagen business school, cepr, nber, and aqr capital management. Bac produces strong performance in the us and internationally, supporting leverage constraint theories. Frazzini and pedersen 2014 document that a betting against beta strategy that takes long positions in lowbeta stocks and short positions in highbeta stocks generates a large abnormal return of.
Two crosssectional components exploiting the beta anomaly attributable to stock selection and rank weighting scheme, and one timeseries component with a dynamic netlong position due to betaparity. Fanduel hits jackpot after betting against patent trial. The obvious candidates are the paired invesco high beta and lowvolatility etfs. Betting against beta bab can be seen as the combination of three investable component portfolios. Frazzini and pedersens 2014 betting against beta bab factor is based on the same basic idea as blacks 1972 betaarbitrage, but its astonishing performance has generated academic interest and made it highly influential with practitioners. Thats why i keep telling students that these papers have a lot of entry barriers, so its difficult to read the paper. This performance is driven by nonstandard procedures used in its construction that effectively. Similarly, looking at the holdings of berkshire hathaway, we see that warren buffett bets against beta by buying lowbeta stocks and applying leverage. This paper demonstrates that investors demand for lotterylike stocks generates the betting against beta effect. A basic premise of the capital asset pricing model capm is that all agents invest.
Betting against beta a basic premise of the capital asset pricing model capm is that all agents invest in the portfolio with the highest sharpe ratio, or expected excess return per unit of risk, and leverage or deleverage this portfolio to suit their risk preferences. Therefore, the baa and bab factors should summarize the information about betting against most factors beta strategies. This appendix contains additional empirical results and robustness tests. Frazzini and pedersen s 2014 betting against beta bab factor is based on the same basic idea as black s 1972 betaarbitrage, but its astonishing performance has generated academic interest and made it highly in. Pedersen page 4 security market line is not isolated to the u. Asset pricing program we present a model in which some investors are prohibited from using leverage and other investors leverage is limited by margin requirements. May 03, 2012 we find evidence consistent with each of the models five central predictions. Betting against beta or demand for lottery request pdf. Basically there is something called a capital asset pricing model, the formula is like this. Portfolio and regression analyses show that the betting against beta phenomenon disappears after.
August 2015 abstract the low high abnormal returns of stocks with high low beta, dubbed the betting against beta phenomenon, is the most persistent anomaly in empirical asset pricing research. Betting against beta or demand for lottery q group. No 16601, nber working papers from national bureau of economic research, inc abstract. The former investors bid up highbeta assets while the latter agents trade to profit from this, but must delever when they hit their margin constraints. It is examined how well traditional risk factors can explain those returns. Low volatility and low beta strategies are popular with institutional investors, pension funds, and insurance companies. Betting against beta by andrea frazzini, lasse heje pedersen. Two crosssectional components exploiting the beta anomaly attributable to stock selection and. We introduce a new betting against correlation bac factor that is particularly suited to differentiate between leverage constraints vs. A bab factor is a portfolio that holds low beta assets, leveraged to a beta of 1, and that shorts high beta assets, deleveraged to a beta of 1. Understanding defensive equity university of rochester. Frazzini and pedersen 2014 document that a betting against beta strategy that takes long positions in low beta stocks and short positions in high beta stocks generates a large abnormal return of. Although betting against beta with government bonds babgov seems profitable, questions remain. Pedersen 11 betting against beta factors proposition 2.
This is the most important thing, entire strategy now is explaining these two lines. This paper extends this evidence on betting against beta with government bonds bab gov in four respects. According to equation 2 the baa factor should capture the information on betting against smart beta factors. Jari viirret betting agains beta with conditional modeling in. First, outofsample tests suggest that excess returns may have waned somewhat recently and that the pattern seems most pronounced for usts given data on ten other previously unexamined government bond markets. So therefore, a betting against beta, bab factor, which is long leveraged low beta assets and short high beta assets, produces significantly positive riskadjusted returns. A basic premise of the capital asset pricing model capm is that all agents invest in the portfolio with the highest sharpe ratio, or expected excess return per unit of risk, and leverage. Betting against beta and gamma using government bonds j. Pdf betting against beta betting against beta we thank. Oct 27, 2014 an etf implementation of betting against beta. To find out whether the betting against beta exists in the stock market i study the portfolio returns on both absolute and riskadjusted basis. Pdf betting against beta or demand for lottery semantic. Understanding the performance of components in betting.
A bab factor is a portfolio that holds lowbeta assets, leveraged to a beta of one, and that shorts highbeta assets, deleveraged to a beta of one. Our expected return of a stock is rf, ill tell you what these terms are, rm minus rf into beta. B1 plots the sharpe ratio annualized of betasorted portfolios for. Oct 25, 2018 the basic bet against beta strategy is to find assets with higher betas and take a short position in them. Dec 27, 2018 although betting against beta with government bonds babgov seems profitable, questions remain. This data set is related to betting against beta frazzini and pedersen, 2014. Fanduel hit what a delaware federal judged called the jackpot thursday when it managed to beat the cg technology developments infringement claims after. E43,g1,g12,g14 abstract we present a model in which some investors are prohibited from using leverage and other investors. However, many investors such as individuals, pension funds and mutual. We find evidence consistent with each of the models five central predictions. The zerobeta betting against beta bab factor is a selffinancing portfolio that is long the lowbeta portfolio and short the highbeta portfolio. Frazzini and pedersens 2014 betting against beta bab factor is based on the same basic idea as black s 1972 betaarbitrage, but its astonishing performance has generated academic interest and made it highly influential with practitioners.
Betting against betting against beta by robert novymarx. Stocks are weighted by the ranked betas, and the portfolios are rebalanced every calendar month. Journal of financial economics lasse heje pedersen. Betting against beta bab construction alpha architect. The basic bet against beta strategy is to find assets with higher betas and take a short position in them.
Jan 01, 2014 betting against beta a basic premise of the capital asset pricing model capm is that all agents invest in the portfolio with the highest sharpe ratio, or expected excess return per unit of risk, and leverage or deleverage this portfolio to suit their risk preferences. Motivation traditional porfolios including the market portfolio dominated by. A bab factor is a portfolio that holds low beta assets, leveraged to a beta of one, and that shorts high beta assets, deleveraged to a beta of one. Betting against beta capm strategy betting against.
They create something known as bab factor, betting against beta factor. Still, much of its mystery is explained by several nonmarket risk factors find. August 2014 abstract frazzini and pedersen 2014 document that a betting against beta strategy that takes long positions in lowbeta stocks and short positions in highbeta stocks generates a. Betting against beta andrea frazzini aqr capital management llc lasse h. Betting against betting against beta robert novymarxz mihail velikov november, 2018 abstract frazzini and pedersens 2014 betting against beta bab factor is based on the same basic idea as blacks 1972 betaarbitrage, but its astonishing performance has generated academic interest and made it highly in. Besides us equities,frazzini and pedersen2014 show that bab achieves. However, the construction for the betting against beta bab factor in the paper is definitely different than other standard academic factor portfolios. We present a model in which some investors are prohibited from using leverage and other investors leverage is limited by margin requirements.
Long lowbeta securities, leveraged to a beta of 1 short highbeta securities, deleveraged to a beta of 1. Betting against beta by andrea frazzini, lasse heje. August 2015 abstract the low high abnormal returns of stocks with high low beta, dubbed the betting against beta phenomenon, is the most persistent. Available only in pdf 44 pages 493 kb author disclosure statements tools. When funding constraints tighten, betas are compressed towards one, and the return of the bab factor is low. The zero beta betting against beta bab factor is a selffinancing portfolio that is long the low beta portfolio and short the high beta portfolio. One way to illustrate the asset pricing effect of the funding friction is to consider the returns on marketneutral betting against beta bab factors. Betting against beta introduction strategy betting. Betting against beta strategy strategy betting against. This table includes all available common stocks on the xpressfeed global database for the 19 markets listed in table 1. Pdf managing the risk of the bettingagainstbeta anomaly.
Request pdf betting against beta we present a model in which some investors are prohibited from using leverage and other investors leverage is limited by. Betting against beta in brazil unlike assumed by the capm, leverage and margin constraints prevent agents from simply leveraging or deleveraging their optimal allocations to reach their risk appetite. The low high abnormal returns of stocks with high low beta, dubbed the betting against beta phenomenon, is the most persistent anomaly in empirical asset pricing research. Betting against beta prepared for the fiduciary investors symposium, beijing 2011 lasse h. Betting against beta, andrea frazzini and lasse heje pedersen 2010. It has been documented that in belgiums betting against beta factors risk adjusted returns are one of the highest in the world. I think we need to spend a couple of minutes on that before we do the strategy of betting against beta.
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